MNI INTERVIEW: BOC To Hold As Tariff Doom Avoided-Ex Govt Econ

Canada's central bank is set to pause its cutting cycle this month for the first time since June, shifting to cuts at every second meeting over the balance of this year, after Donald Trump refrained from adding to tariffs on the country in his latest round of sweeping global levies, a former staffer at Quebec's finance department and market regulator told MNI's podcast. 

“With the seven cuts we’ve had already they can afford to take maybe one meeting off just to reassess,” said Sebastien Mc Mahon, part of a group of economists which meets BOC officials to review the outlook. “First do no harm, you don’t want to bring more uncertainty from monetary policy here."

Governor Tiff Macklem has said trade threats mean forward guidance must be less detailed, with policy ready to nimbly respond to major risks. Canada's economy appears to be coming out on the low end of the Bank's scenarios around trade war damage, Mc Mahon said, with the U.S. more likely to sink into recession than Canada as a result of tariffs. (See MNI INTERVIEW:Tariffs Freeze Fed, Court Global Recession-Fatas)

“This is not the 1930s, I do not expect the global economy to go into a recession here, but the odds of a U.S. recession are rising quite a bit,” said Mc Mahon, now chief strategist at Industrial Alliance Global Asset Management in Quebec City. “Because of that, there is need for concern on the Canadian front for 2025, but let’s say this is the least bad scenario.”

Bank officials have signaled they were leaning towards a pause, with minutes from the March meeting saying they probably would have stopped already if it had not been for tariff risks. (See MNI INTERVIEW: BOC To Cut More, Wary Of Inflation- Ex Staffer)

EVERY OTHER MEETING

The U.S. decision not to expand earlier tariffs on Canadian autos and goods that don't comply with USMCA standards when it announced its “reciprocal” global round of charges last week tilts the policy focus more toward retaliation and inflation. Canada has opted only to match tariffs on finished autos and not parts. “If the retaliation measures are inflationary of course if you’re the Bank you don’t want get inflation expectations to get out of control,” Mc Mahon said. 

The overnight rate has already been cut from 5% to about neutral at 2.75%, as officials have noted. While the Bank made some big cuts last year as headline inflation eased, core prices have lingered above the 2% target and wage growth has been surprisingly hot despite higher unemployment. Unlike the Fed's dual mandate including maximum employment, the Bank has a single inflation target. 

Slower growth will do enough for the Bank to cut into clearly stimulative territory of 2% by year-end, Mc Mahon said. “You give a very clear path for the Bank to continue to cut things throughout the year,” he said. “It’s fair to think the Bank will be cutting at every other meeting.”

Federal leaders campaigning ahead of an April 28 election are promising tax cuts and spending to help industries hurt by tariffs, but Mc Mahon said any such measures should be limited and targeted. He agreed with IMF estimates that unlocking potential gains from internal free trade and boosting productivity could mostly offset damage from tariffs. (See MNI: Canada Will Struggle To Wean Off U.S. Trade Dependence)

“It’s a big wake-up call that I think that Canada needed,” he said. “Shield the blow in some sectors but try to work on creating more wealth through more productivity.”